The Yugoslav Government has dismissed a deputy defence minister after allegations that a state-run firm was involved in arms sales to Iraq.

Ivan Djokic was sacked after the US accused the Jugoimport company of helping a Bosnian Serb firm sell spare parts for fighter planes to Baghdad.

We want to clear up this affair, hoping it will have no impact on further development of our relations with the US and UN

Interior Minister Dusan Mihajlovic

The head of Jugoimport, Jovan Cekovic, has also been dismissed, after the company was accused of acting as an agent for the Orao military factory based in the Serb-run part of Bosnia, Republika Srpska.

Both companies deny the allegations which, if true, constitute a breach of a United Nations embargo against Iraqi President Saddam Hussein's regime.

Damage limitation

The Belgrade government has ordered a thorough investigation of the charges, which emerged after Nato peacekeepers inspected Orao's plant in eastern Bosnia.

It is claimed that the factory supplied engine parts for Iraqi Soviet-built Mig fighters and sent technicians to Baghdad to help service the planes.

The UN has imposed sanctions on Saddam's regime

"We want to clear up this affair, hoping it will have no impact on further development of our relations with the United States and the United Nations," Interior Minister Dusan Mihajlovic said.

Mr Mihajlovic, who is chairman of Jugoimport's managing board, said he had not had any information on "any exports of weapons to Iraq".

Jugoimport has been ordered to close its Baghdad offices.

Old allies

The US State Department has called on both Yugoslavia and Bosnia to halt all transfers, investigate the sales and prosecute those found responsible.

Spokesman Richard Boucher said there was "clear evidence" that both companies had provided military supplies to Iraq, but said there was nothing to suggest either country had played a direct role.

US concern is thought to focus on the breaking of the UN embargo, as the services provided to Iraq are not seen as being of any particular military significance.

Yugoslavia has a historically strong relationship with Iraq, fostered in part by the friendship between communist President Josip Tito and President Saddam Hussein.

Later, the common isolation of President Slobodan Milosevic and the Iraqi leader also brought the two countries together.